Politics and New Currencies : NHC History Blog
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Franklin Noll, PhD
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Franklin Noll's Blog on Monetary and Financial History.

Politics and New Currencies

by Franklin Noll on 07/25/20


Treasury Coin Note, Series 1890

New currencies are often the target of politics.  This not only applies to cryptocurrencies but also to past US currencies.

It may surprise some people that US currencies are not created by the US Treasury or the Federal Reserve but by the US Congress.  Congress can determine the date of issuance, the amount to be issued, the backing of the currency, the denominations allowed, and even what must appear on the notes.  

So, it has been the case that currencies have been created or manipulated not to solve economic problems but to solve political ones.

The prime example of this was the Treasury Coin Note—a currency the Treasury did not want and tried to end as quickly as possible.

The story of the Treasury Coin Note starts with the Panic of 1873, which caused an economic depression in the US.  To try and rectify the situation, Congress wanted to inflate the currency or do some quantitative easing.  To do this, Congress created Silver Certificates in 1878.  Backed by silver coin, these banknotes were injected into the economy, expanding the money supply.  In the process, this action made silver mining interests in the western US very happy because the law creating Silver Certificates also mandated that the US Treasury had to buy at least $2 million in silver every month.

By 1890, the US economy was recovering.  However, the discovery of new silver deposits in the western US created a glut in the silver market and prices were dropping.  Lobbyists for the silver interests were able to convince Congress to pass a law forcing the US Treasury to buy even more silver per month—at least 4.5 million ounces.  This extra silver would be used to back a new currency called the Treasury Coin Note.  The Sherman Silver Purchase Act of 1890 made the mining interests very happy.  The resulting expansion in the money supply and resulting price inflation also pleased farming interests who could now pay of their debts more cheaply.

The US Treasury saw no economic or monetary need for Treasury Coin Notes and the purchase of all that silver.  Indeed, given that the US was on the gold standard, the increase of silver in the money supply was a danger.  The infusion of silver dropped the price of gold, eventually leading to a crisis as there was a run on gold held by the Treasury.  Seeing the impending collapse of the gold standard, Congress was convinced in 1893 to repeal the act, ending the politically created Treasury Coin Note.

So, with new currencies, then as now, we need to be aware of the politics involved.  This is something studied by Noll Historical Consulting.

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